Inequality, Low Wages Weaken Global Growth

A hollowing out of the middle class in advanced economies like the US, amid weak wage growth and rising inequality, is holding back global growth, a senior IMF official said.

Tao Zhang, the International Monetary Fund's deputy managing director, said the fund's economic growth forecasts due out next month, will show little change in the global recovery that is still relatively slow, AFP reported.

"Nearly a decade after the global financial crisis, the global economy is getting better," Zhang told a gathering of business economists in Cleveland, Ohio.

The IMF in July forecast global economic growth of 3.5% this year, up from 3.2% last year, and accelerating to 3.6% in 2018.

While this is "good news," a 3.5% global growth rate is weak in historical terms, he said. Zhang pointed to slowing productivity growth, income inequality and low wage growth and weak inflation as culprits.

Inequality in US

The IMF forecast US growth of 2.1% this year and in 2018, up from 1.6% in 2016. While that would constitute the second-longest expansion since 1850 it is well below President Donald Trump's goal of 3%.

More than half of US households now have lower incomes, when accounting for inflation, than they did in 2000, Zhang said. And around two-thirds of households leaving the middle-class are falling into the bottom segment of income distribution, earning less than half the US median income, he added.

That income inequality is weighing on overall global consumption, reducing it by about 3.5% over the last 15 years, he said. "This represents an important headwind to aggregate demand," suggesting these developments have driven the recent rise of protectionism and nationalism in western countries. "I know all of us are aware of the social and political ramifications that have accompanied these shifts in the level and distribution of household income."

Zhang called for targeted social assistance programs, increased education and job training, a higher minimum wage, support for child care and paid family leave, as well as greater tax assistance to the poor as remedies for the concentration of income.

IMF chief Christine Lagarde last week warned that the US will fall short of its ambitious economic growth goals unless it can accelerate promised policy changes, including tax reform, and has long argued in favor of the kinds of policies Zhang called for.

Strong Growth Necessary

Economic growth provides the basis for overcoming poverty and lifting living standards. But for growth to be sustained and inclusive, its benefits must reach all people, imf.org reported last week. While strong economic growth is necessary for economic development, it is not always sufficient.

"Over the past few decades, growth has raised living standards and provided job opportunities, lifting millions out of extreme poverty. But, we have also seen a flip side. Inequality has risen in several advanced economies and remains stubbornly high in many that are still developing. This worries policymakers everywhere for good reason."

Research at the IMF and elsewhere makes it clear that persistent lack of inclusion—defined as broadly shared benefits and opportunities for economic growth—can fray social cohesion and undermine the sustainability of growth itself.

A Few Facts

Income inequality has been declining, when the world is considered. The decline is due in large part to strong growth in many emerging market and developing economies, although two-thirds of global inequality is still attributable to differences in average income between countries.

However, if the countries are considered individually, income inequality rose sharply in many places. In the most advanced economies, the bulk of the gap opened from the 1990s until the mid-2000s. In emerging market and developing economies, inequality is still high, even though it declined in recent decades in many of them.

Lack of inclusion also manifests itself in unequal access to jobs and basic services, such as health and education. To cite just a few examples: over 200 million people around the world are unemployed, with youth unemployment at alarming levels in many countries. Mortality rates for some segments of the population are increasing, including in the United States.

Some 20% of adults in advanced economies remain excluded from formal access to finance: for example, they do not have an account with a financial institution. Finally, wide-spread gender discrimination has led to persistent differences in health, education and incomes between men and women in large parts of the world.